The opinion of the court was delivered by: WILKIN
The controversy had its inception in a 'Plan of Affiliation' agreed to by the Corrigan, McKinney Steel Company, party of the first part, and Edward F. Clark, H. C. Fownes, R. T. Wilson, J. W. Ford, and Elton Hoyt, parties of the second part, acting for and in behalf of themselves and all holders of stock of the Newton Steel Company, and the question is whether that Plan and subsequent acts of the majority stockholders of Newton were legal. The Plan was dated June 30, 1932, and was occasioned by the exigencies of the time and the necessities of the business of the two steel companies. The Corrigan Company was a manufacturer of steel bars and was the chief source of supply of raw material for the Newton Company. The Newton Company was a manufacturer of steel sheets and was the chief outlet for the product of the Corrigan Company. The Newton Company had two plants, one at Newton Falls, Ohio, and one at Monroe, Mich. The Ohio plant was closed prior to the date of the affiliation agreement.
During the general business depression inland steel plants found it difficult if not impossible to meet the competition of plants located on the waterways. The construction of the Monroe plant in 1929-30 was probably prompted by that fact as well as by improvements in the method of rolling sheets developed about that time. The construction of the new plant and the stringency of business conditions had involved the Newton Company in heavy obligations and prior to the Plan of Affiliation the Corrigan Company had given financial assistance to the Newton Company. In January, 1932, the Newton Company provided for a first mortgage 7% Gold Bond issue in the principal amount of $ 4,000,000, and $ 3,000,000 of such bonds were immediately issued to the former holders of Gold Notes which had matured December 31, 1931. At Newton's request Corrigan purchased $ 129,000 worth of Gold Notes from holders who had refused to exchange them for bonds and had then exchanged such notes for a like amount of bonds and had also guaranteed the payment of $ 25,000 worth of Newton's bonds in order to induce another holder of Gold Notes to exchange them for bonds. Prior to 1932 there were in existence contracts between Corrigan and Newton by which Newton agreed to buy and Corrigan agreed to sell steel bars, and Newton had been buying practically all its bars from Corrigan.
By the terms of the Plan Corrigan became obligated to issue certain shares of its stock to those shareholders of Newton who desired to exchange on the basis stated in the Plan. It was further provided that shareholders who desired to make such exchange could deposit their shares at any time to and including August 15, 1932, at which time the Plan became operative if 67% of the outstanding shares of Newton, common and preferred, had been so deposited for exchange. The Plan further provided that 'The Newton Steel Company is in need of additional working capital and it is contemplated that Corrigan, McKinney may make advances to Newton by way of cash or credit, accepting notes of Newton for the amount of such advances, such notes to be secured by the pledge * * * of bonds * * * in an aggregate principal amount double the amount of each such note, the bonds so pledged being also security for any and all obligations of Newton to Corrigan, McKinney in addition to said notes'.
This suit is brought by and for the holders of the remaining 20% of outstanding shares of Newton. The Plan became operative on August 15, 1932, and was approved by Corrigan shareholders on August 26, 1932. On September 28, 1932, Messrs. Ford, Fownes, Hoyt, and Butts resigned as directors of Newton and Messrs. Ferris, Croxton, Gillies, and Mather (of the Corrigan board) were elected to fill the vacancies. Clark resigned as President of Newton and was elected as General Manager. Gillies, who was then President of Corrigan, was also elected as President of Newton to succeed Clark.
In November, 1932, arrangements were made between Newton and Corrigan, as reported to their respective boards, whereby a large quantity of bars was shipped by Corrigan to Newton by boat for storage on a consignment basis at the Monroe plant. This arrangement was made to afford Newton lower freight rates and Newton was allowed to pay for the bars as it used them. Such consignment agreement was subsequently amended and supplemented. By action of the boards of both companies the listing of Newton's stock on the New York Stock Exchange was discontinued. In November, 1933, Corrigan and Newton entered into a finance agreement which had been worked out by the respective committees of the two companies to provide for extension of credit and monetary advances to Newton by Corrigan.
By February, 1933, Corrigan had advanced to Newton $ 500,000 and had accepted bonds as provided in the affiliation plan and Corrigan had further extended credit to Newton on open account in the amount of $ 253,796.62. In June, 1933, Corrigan advanced to Newton the funds necessary to meet the interest on Newton's bonds due July 1. In November, 1933, Corrigan notified Newton that it could not extend further unsecured credit, and Newton's board authorized its officers to give Corrigan security for payment of bars purchased, by assigning accounts receivable.
Newton's annual report for 1933 showed a net loss of $ 1,026,795.68. On January 25, 1934, Newton was indebted to Corrigan in the amount of $ 1,528,521.95 for bars purchased. At that time Newton authorized the sale to Corrigan of finished products to the extent of $ 200,000 and the execution to Corrigan of leases for sufficient space in Newton's plants to store the products. In March, 1934, Corrigan extended further credit for necessary equipment in Newton's Monroe plant, and in July of that year a further extension of credit was made by Corrigan to enable Newton to pay bond interest then due. During the summer of 1934 Newton considered methods of refunding its bonds which were to mature January 1, 1935. A committee recommended to the Newton board that the company endeavor to refund with a new issue of 5% bonds, provided arrangements could be made with Corrigan to guarantee the principal and interest of the new bonds.
On August 27, 1934, the Corrigan Company and the defendant Republic Steel Corporation entered into an agreement by which on September 23, 1935, the defendant acquired in exchange for certain stocks and bonds all the assets of Corrigan and assumed all of Corrigan's obligations and liabilities. All the shares of the Newton Company which were owned by Corrigan and the obligations of the Newton Company to the Corrigan Company were included in the assets so acquired by the defendant. Corrigan's activity in the steel business then terminated.
In September, 1935, directors for the Newton Company were elected and representatives of the defendant Republic Steel Corporation were added to the board. During October, November, and December the defendant purchased all the bonds of the Newton Company outstanding, except $ 134,000 worth, and it advanced that amount to Newton in order that Newton might retire such bonds. Newton's annual report for 1935 disclosed a loss of $ 827,138.64, and that Newton was indebted to defendant in the amount of $ 1,799,821.54. The accumulation of unpaid dividends on Newton's outstanding preferred stock was $ 723,800.
While those foreclosure suits were pending the defendant continued to advance funds to Newton to keep its plant in operation, in spite of the fact that the indebtedness of Newton to defendant on open account was $ 1,060,794.80. On March 17 the mortgaged property in Ohio was sold at judicial sale to the mortgage trustees, and the property in Michigan was sold on August 24, 1937. A deficiency judgment was entered in the amount of $ 536,989.61. During August, 1937, Newton sold to defendant its property not covered by mortgage, consisting of finished products, work in process, stores, supplies, and miscellaneous equipment.
On July 30, 1936, this suit was instituted, the prayer of the original complaint being for an injunction against the prosecution of the foreclosure suits and an award to plaintiff of compensation for its shares in Newton on the same basis as former shareholders ...